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In early 2016, Canada’s Minister of Finance convened the Advisory Council on Economic Growth to examine the long-term potential of Canada’s economy. In February 2017, the Council released a series of reports with their recommendations for improving the prospects for inclusive economic growth in Canada.
Of their five interlocking recommendations to accelerate innovation and help more Canadian start-ups and SME’s achieve scale, they stated that Canada should build a value-added growth capital strategy focused on Canada’s fastest-growing firms. These initiatives would help Canada raise its global competitiveness, achieve inclusive growth goals and create a more resilient economy and labour force.
One of the fundamental problems they noted with Canadian innovation is that entrepreneurs are good at launching companies, but very few achieve significant scale. Canada ranks second in ease of establishing a new firm, but the problem is that many companies do not grow beyond a certain point. The reasons noted include a small and fragmented local market, shortages of experienced business talent, a lack of at-scale sources of growth capital, and an aversion to risk on the part of some of Canada’s established companies.
Part of this challenge in achieving growth is finding and hiring experienced business talent. Canada has relatively few companies that have scaled through all stages of growth and doesn’t possess a community of large companies to train this type of talent.
Another challenge that was identified is the limited access to value-added growth capital in Canada. As compared to their peers in the United States, more than twice as many fast-growing companies in Canada cited insufficient access to risk capital as their greatest concern. In addition to funding, CBGF provides entrepreneurs with access to its Talent Network which is designed to connect entrepreneurs with seasoned executives that bring relevant experience and connections, including access to the operational expertise, strong customer relationships, and top industry talent needed to scale a business.
We can be flexible with our structures to suit the company’s situation. We can invest via preferred shares, convertible shares or notes, notes or common shares. We typically seek a board seat and certain minority shareholder protections.
In an evergreen fund structure, the fund has an indefinite fund life. The biggest benefit of the evergreen structure is the total focus on helping portfolio companies to drive growth instead of having our attention divided on raising a new fund. For portfolio companies, another benefit of our structure is that we don’t need the ability to force them to exit.
We are unique in that we have a broad industry focus. We want to help growing Canadian companies driven by ambitious management teams. For example, our first two investments were in the FinTech industry and Auto Repair sector which demonstrate our range.
CBGF is restricted from investing in start-ups, real estate development, resource extraction, cannabis, weapons, and businesses operating in the insurance industry. Companies that provide services to these sectors are eligible.
CBGF cannot hold a controlling stake in a business, participate in a change of control buyout, or invest in a company headquartered outside of Canada. We prefer to avoid opportunities with a highly-levered balance sheet, as it restricts the potential for reinvestment.
We make initial investments throughout our stated range of $3 million to $20 million in exchange for a minority stake in the company, with the ability to make follow-on commitments over the life of our investment.
Because CBGF has an evergreen structure, our holding period is not defined with specific time frames. The business owner can set the growth rate and business strategy that is best for the business, not necessarily a strategy and exit horizon dictated by an investor’s fund-level restrictions. The longer-term focus of the fund removes a lot of the pressure to put money to work and exit investments based on motivations or limitations at fund level. It will be the company’s decision when to exit, not ours.
The Talent Network is a collection of Canadian seasoned entrepreneurs, executives, advisors and mentors that have partnered with the CBGF in order to help the management teams of the companies it backs to reach the next level. This guidance can take the form of mentorship, board members, advisors, board chairs or consultants. We believe this network is a huge differentiator for companies backed by CBGF.
Yes, our goal is to do what’s best for the company. We are happy to work with other investors with similar goals and aspirations.
The core proposition for CBGF is to invest in existing businesses that have strong entrepreneurial and management leadership, established customer bases, strong operations and some record of or a clear path to profitability.
For clarity, the Fund is not targeting early-stage technology companies. We will evaluate and invest in companies that may not yet generate positive cash flow, but have a proven business model, run rate revenues over $5mm, and a clear path to profitability. Many established companies are prioritizing growth over short-term profit and are investing heavily in their business (e.g. product development, scaling their team, and sales marketing) to capitalize on their growth opportunity. When screening investment opportunities that are not generating positive cash flow, we spend a significant amount of time to understand its business model, the riskiness of its revenue streams, and the path to profitability before the initial CBGF investment is made.
We may consider an investment to help a business repay debt or restructure its balance sheet, with an objective of freeing up cash flow and/or relieving covenant pressure to pursue growth strategies that could lead to follow-on investments.
A majority of any CBGF investment is to be used for growth. One of the common barriers to growth we encounter are the competing goals of active management/shareholders and those of inactive or retiring shareholders. One group seeks growth and reinvestment, while the other is seeking to sell or to extract annual dividends from the business. This dynamic needs to be resolved before a business can make a commitment to an ambitious growth strategy.
Depending on the circumstances of any given transaction, up to 49% of CBGF’s overall investment could be used for shareholder buyout so long as the payout isn’t excessive (based on circumstances) and it facilitates an accelerated growth strategy.
We work fast to match the pace of our entrepreneurial partners. Our process is streamlined, and our approval process resides in the fund. We typically close within 6 to 8 weeks of signing a term sheet. Many other firms work in 90-120 day time periods. We don’t need fancy presentations – we work with the information you readily have available.
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